The crucial role of democracy in economics

The free-market needs regulation, so the world is safe for democracy, not just business.

About the Author

Dani Rodrik is author of The Globalization Paradox and professor of IPE at Harvard University.

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I have been presenting my new book, The Globalisation Paradox, to different groups of late. By now I am used to all types of comments from the audience. But at a recent book-launch event, the economist assigned to discuss the book surprised me with an unexpected criticism.

"Rodrik wants to make the world safe for politicians," he huffed.

Lest the message be lost, he then illustrated his point by reminding the audience of "the former Japanese minister of agriculture who argued that Japan could not import beef because human intestines are longer in Japan than in other countries."

The comment drew a few chuckles. Who doesn't enjoy a joke at the expense of politicians?

But the remark had a more serious purpose and was evidently intended to expose a

When decisions are made purely on the basis of profit versus loss, global economic well-being becomes secondary to multi-nationals' profit-making ability [GALLO/GETTY]

I have been presenting my new book, The Globalisation Paradox, to different groups of late. By now I am used to all types of comments from the audience. But at a recent book-launch event, the economist assigned to discuss the book surprised me with an unexpected criticism.

"Rodrik wants to make the world safe for politicians," he huffed.

Lest the message be lost, he then illustrated his point by reminding the audience of "the former Japanese minister of agriculture who argued that Japan could not import beef because human intestines are longer in Japan than in other countries."

The comment drew a few chuckles. Who doesn't enjoy a joke at the expense of politicians?

But the remark had a more serious purpose and was evidently intended to expose a fundamental flaw in my argument. My discussant found it self-evident that allowing politicians greater room for maneuver was a cockamamie idea - and he assumed that the audience would concur. Remove constraints on what politicians can do, he implied, and all you will get are silly interventions that throttle markets and stall the engine of economic growth.

This criticism reflects a serious misunderstanding of how markets really function. Raised on textbooks that obscure the role of institutions, economists often imagine that markets arise on their own, with no help from purposeful, collective action.

Adam Smith may have been right that "the propensity to truck, barter, and exchange" is innate to humans, but a panoply of non-market institutions is needed to realise this propensity.

Consider all that is required. Modern markets need an infrastructure of transport, logistics, and communication, much of it the result of public investments. They need systems of contract enforcement and property-rights protection. They need regulations to ensure that consumers make informed decisions, externalities are internalised, and market power is not abused. They need central banks and fiscal institutions to avert financial panics and moderate business cycles. They need social protections and safety nets to legitimise distributional outcomes.

Governance in economics

Well-functioning markets are always embedded within broader mechanisms of collective governance. That is why the world's wealthier economies, those with the most productive market systems, also have large public sectors.

Once we recognise that markets require rules, we must next ask who writes those rules. Economists who denigrate the value of democracy sometimes talk as if the alternative to democratic governance is decision-making by high-minded Platonic philosopher-kings - ideally economists!

But this scenario is neither relevant nor desirable.

For one thing, the lower the political system's transparency, representativeness, and accountability, the more likely it is that special interests will hijack the rules. Of course, democracies can be captured too. But they are still our best safeguard against arbitrary rule.

Moreover, rule-making is rarely about efficiency alone; it may entail trading off competing social objectives - stability versus innovation, for example - or making distributional choices. These are not tasks that we would want to entrust to economists, who might know the price of a lot of things, but not necessarily their value.

True, the quality of democratic governance can sometimes be augmented by reducing the discretion of elected representatives. Well-functioning democracies often delegate rule-making power to quasi-independent bodies when the issues at hand are technical and do not raise distributional concerns; when log-rolling would otherwise result in sub-optimal outcomes for all; or when policies are subject to myopia, with heavy discounting of future costs.

Independent central banks provide an important illustration of this. It may be up to elected politicians to determine the inflation target, but the means deployed to achieve that target are left to the technocrats at the central bank. Even then, central banks typically remain accountable to politicians and must provide an accounting when they miss the targets.

Similarly, there can be useful instances of democratic delegation to international organisations. Global agreements to cap tariff rates or reduce toxic emissions are indeed valuable. But economists have a tendency to idolise such constraints without sufficiently scrutinising the politics that produce them.

The importance of democratic deliberation

It is one thing to advocate external restraints that enhance the quality of democratic deliberation - by preventing short-termism or demanding transparency, for example. It is another matter altogether to subvert democracy by privileging particular interests over others.

For instance, we know that the global capital-adequacy requirements produced by the Basel Committee reflect overwhelmingly the influence of large banks. If the regulations were to be written by economists and finance experts, they would be far more stringent. Alternatively, if the rules were left to domestic political processes, there could be more countervailing pressure from opposing stakeholders (even though financial interests are powerful at home, too).

Similarly, despite the rhetoric, many World Trade Organisation agreements are the result not of the pursuit of global economic well-being, but the lobbying power of multinationals seeking profit-making opportunities.

International rules on patents and copyright reflect the ability of pharmaceutical companies and Hollywood - to take just two examples - to get their way. These rules are widely derided by economists for having imposed inappropriate constraints on developing economies' ability to access cheap pharmaceuticals or technological opportunities.

So the choice between democratic discretion at home and external restraint is not always a choice between good and bad policies. Even when the domestic political process works poorly, there is no guarantee that global institutions will work any better. Often, the choice is between yielding to domestic rent-seekers or to foreign ones. In the former case, at least the rents stay at home!

Ultimately, the question concerns whom we empower to make the rules that markets require. The unavoidable reality of our global economy is that the principal locus of legitimate democratic accountability still resides within the nation state.

So I readily plead guilty to my economist critic's charge. I do want to make the world safe for democratic politicians. And, frankly, I wonder about those who do not.

Dani Rodrik, Professor of International Political Economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy.

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